Ownership structure, Voting and Risk

We analyze the determinants of ownership structure in firms when conflicts of interest on risk arise endogenously via different ownership stakes and firm decisions are made through majority voting. A large block is chosen to incentivize monitoring. Because a large blockholder holds a large share of the firm, he is averse to risky investing. This generates a conflict of interest with dispersed shareholders. Mid-size blockholders, voting in favor of middle of the road projects, mitigate the conflict of interest. Depending on monitoring costs, voting institutions and the nature of the industry, three types of ownership structures arise: one large shareholder with a fringe of dispersed owners, multiple large shareholders and fully dispersed shareholders.